China’s Petrol-Free Incentive: Implications for Tesla Motors and the Industry

China is looking to ban internal combustion engine (ICE) cars, according to a Chinese Government official.

Xinhua, the official press agency of China, reported Sunday the Chinese government has begun to look into a ban on said vehicles without disclosing any timeline. However, Xin Guobin, vice minister of industry and information technology, said the policy will be implemented in the near future.

In other news, PSA Group, a French carmaker, vowed to support the electrification of vehicle powertrains. The company plans to support Opel in launching electric cars on the condition of profitability. Carlos Tavares, chairman of PSA’s managing board, sees lack of profitability to be a problem in the industry. The company recently acquired Opel and Vauxhall in an approximately $2.63 billion deal.

Together, these developments reveal how the industry is turning out to be. Governments are pushing the electric vehicle idea while corporations are reluctant to adopt due to profit concerns. However, the recent push from China might do the trick.

The environmental impact EVs have is not yet completely clear, but more will be discovered as the industry evolves. There are many factors at play, not only the lifecycle of an electric vehicle. Battery production can also adversely impact the environment; mining of rare metals can also add to the problems. On the other hand, EVs can help reduce the direct carbon footprint of internal combustion engines.

The problem is there are so many variables, which makes the comparison quite complex. That is why it is difficult to gauge the environmental benefits of EVs over ICEs. Nonetheless, the environmental friendliness associated with electric vehicles is driving their adoption.

The environmental impacts are not very straightforward. Batteries using cobalt and nickel have the highest potential for adverse environmental impacts, according to the U.S. Environmental Protection Agency (EPA). The premium EV manufacturer, Tesla Motors (NASDAQ:TSLA), has a heavier carbon footprint compared to conventional vehicles, according to Devonshire Research Group. The research firm argues that dumping batteries will be problematic for the environment as it can generate a toxic burden. According to a report from IVL Swedish Environmental Research Institute, the production of Tesla's car batteries equals the eight-year carbon footprint of driving a gas-powered car. This study, however, received severely skeptic responses from industry watchers.

On the other hand, several other studies highlight the benefits of using EVs over ICE vehicles. Moreover, recycling batteries will reduce the environmental impact of production.

The overall environmental impact of EVs is not very clear, as there are arguments on both sides. However, the general sentiment is EVs are less damaging for the environment compared to ICE vehicles. That is why we see countries pushing for the adoption of EVs.

China’s all-in attitude bodes well for the EV industry

Local palyers will benefit as China eyes reduction in the number of ICE cars.

Along with the petrol ban, China has been looking to drive up the adoption of alternative fuel vehicles. The government wants electric and hybrid cars to make up at least 20% of Chinese automobile sales by 2025. Further, the country is regulating automakers to increase sales of battery electric vehicles (BEVs) and hybrids to 10% and 12% in 2019 and 2020 respectively.

The plan to abandon ICE cars is a key development for the adoption of electric vehicles as China is the largest producer of automobiles in the world. The country produced around 28.1 million vehicles in 2016, beating the U.S by a healthy margin.

The petrol ban incentive bodes well for EV makers along with the Li-Ion battery producers inside and outside of China. Local players, including Warren Buffett-backed BYD Co. Ltd. (BYDDF) and Jiangxi Ganfeng Lithium Co. Ltd. (SZSE:002460), are expected to benefit from China’s EV-friendly policies. Note two of BYD’s cars, Song PHEV and e5, were among the top five selling cars in China in July.

Where does Tesla stand?

Regarding Tesla, optimism should be kept in check as China has a tendency of sticking to home-grown products.

In EV sales, Tesla’s Model S and Model X were down at 18th and 19th place in China in July. The availability of the Model 3 might change that. But currently, Tesla is nowhere near dominating China’s EV market.

The Chinese government, as expected, is also not making things easy for Tesla. The Model S and Model X cost 50% more in China amid stringent import regulations. Tesla held a mere 1.5% market share in the world’s largest EV market in 2016.

This is a part of a bigger problem for Tesla in the international arena. Even in Europe, carmakers are waiting for the profitability queue to mass produce electric cars. There is no technology barrier and car manufacturers have deep pockets, which is one of the reasons why Tesla’s international expansion is at risk.

Governments are usually sensitive to car imports, so it will be difficult for Tesla to compete with local players. We are already seeing this in China. Europe will probably follow once the industry turns profitable.

Bottom line

Despite some environmental concerns regarding battery production, EVs are gaining wide acceptance around the globe. China, the largest car manufacturer, is at the forefront of promoting EVs. A ban of ICE vehicles will benefit EV manufacturers, especially local players.

International players like Tesla, however, are not expected to benefit from the policy. Moreover, competition will be intensified in light of government support.

In short, EVs are here to stay. The same cannot be said about any specific EV manufacturer, but local players should flourish as governments support alternative fuel vehicles.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

About the author:

Soid Ahmad

Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Masters degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.

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